Morning Report: 2 November 2015

2nd November 2015 By: Ranko Berich

GBP Compared to the beginning of last week, sterling starts the week considerably stronger against most of the G10 currencies. Last week’s statement from the Federal Reserve, which indicated that an interest rate hike in the US may be back on the cards for December actually helped to boost sterling as the change in tone from the Fed could also imply that the UK may not be far behind the US in their rate hike cycle. This week will be critical to potentially cement this view. “Super Thursday” as it is known is back this week as it will see a plethora of important data releases from the UK. The Monetary Policy Committee (MPC) summary, the official bank rate, the result of the vote of the MPC members, and also the BOE inflation report will all be released. It is very unlikely that there will be changes in monetary policy this week, although markets will probably pay more attention to the inflation prospects, because if these do not improve for the foreseeable future, interest rates are more likely to remain on hold even if the US acts first. Today, Markit’s manufacturing PMI is released in the UK at 09.30 GMT.

EUR The Euro suffered significant downside fluctuations last week versus the USD and GBP. After the bullishness of the FOMC, the euro fell sharply on the basis of monetary policy divergence between the US and Eurozone. However, EURUSD had recovered most of these initial losses as the end of last week approached, favoured by better than expected Consumer Price Index measures, which clawed back to 1.0% in October year on year, after a somewhat slower September. Market’s Manufacturing PMIs have been released this morning, showing a positive outlook for the Eurozone as a whole. As of yet, the Eurozone’s recent figure have not confirmed Draghi’s dovish outlook, but the ECB’s President will have the opportunity on Wednesday, when is expected to comment on inflation and possibly exchange rates.

USD While the FOMC kept rates unchanged last week, the accompanying statement was widely interpreted to have somewhat of a hawkish slant, with the committee saying they will “assess progress” towards their mandate at the next meeting, leaving the possibility for a December rate hike on the table. At the same time, the committee no longer sees possible restraint on economic activity and inflation from global and financial developments. The consequent USD strength, which in turn weighed on EUR/USD and GBP/USD, was short lived and the major pairs gradually retraced the initial weakness over the subsequent two trading sessions. One factor to note for the weakness in the month-end related flow, which according to analysts at Citi are negative for USD and positive for GBP. As a result, despite the lacklustre UK related data, GBP/USD settled the week higher, albeit marginally. This week sees the release of US NFP, which will garner particular focus since the Fed last week left December on the table for potential lift-off depending on how US data performs.

CAD The Canadian dollar has beaten most of its peers over the course of the last week. This is unsurprising for two reasons; firstly the Gross Domestic Product showed the third consecutive month of growth, something that had not happened since 2014. Secondly, and probably more significant, is that crude oil prices rallied sharply towards the end of last week. In particular, Brent crude oil prices jumped 7.31% after Shell announced it would stop drilling in the Arctic Sea which could prompt a decrease in supply in the short-term.

UK News

  • Reuters. Carney may need help from friends as BoE readies new rates signal: Bank of England Governor Mark Carney may be hoping for a bit more dissent from fellow rate-setters as he prepares to explain next week why the central bank is keeping interest rates at a record low for an 80th month in a row.
  • Daily Mail. Nearly 6m UK workers earn less than the Living Wage – and the number has nudged up steadily in the last two years: Almost six million Britons are earning less than the Living Wage and the proportion of workers not paid enough to allow the purchase of basic necessities is rising steadily.
  • Daily Mail. Sales of costliest houses dry up as top rate of levy on property soars: Proof that stamp duty hike brings in LESS for Treasury: The Treasury is earning less from the sale of Britain’s poshest homes after the Chancellor’s shake-up of stamp duty rates last winter, according to analysis for The Mail on Sunday by a leading estate agent.